COVID-19 and Defined Benefit Pension Schemes

18 November 2020 | Gary Cullen

COVID 19 has no doubt added to the financial difficulty for sponsoring employers of defined benefit pension schemes, and in particular meeting contribution payments under Schedules of Contributions agreed with the trustees.

The Pensions Regulator issued guidance for scheme trustees which was published on 27th March 2020 and updated on 16 June 2020.

It is believed that only around 10% of sponsoring employers initially requested a suspension or reduction in pension contributions since COVID struck, but numbers are likely to increase particularly in sectors with employers affected over the longer term. Lenders may apply pressure to employers over a weakening in their banking covenants leading to employers then wishing to talk to trustees about reducing pension contributions.

The Pensions Regulator does not expect trustees to simply agreeinitial three-month suspensions or extend on a rolling basis, but rather carry out due diligence on the sponsoring employer’s financial position. Where the trustees do establish a material weakening in the employer covenant, they may wish to consider instructing a new actuarial valuation and revising the recovery plan. As always, trustees must have regard to the beneficiaries’ best interests.

Trustees need to consider mitigation where a suspension or reduction of employer contributions is agreed which includes some or all of the following:

  • For contributions to start again based on certain triggers such as when liquidity returns
  • All company dividends to stop during any period of contributions suspension
  • Where part of a refinancing, the trustees need to understand the terms and conditions and attempt to obtain the same access to security and lucrative assets as the Lender
  • Ensure the pension scheme is treated fairly compared with other creditors obtaining increased liquidity
  • Trustees should take legal and actuarial advice regarding repayment of the suspended contributions within the existing recovery timeframe period

Where the employer cannot produce much information in the short term, the trustees should only consider granting a short-term suspension of contributions until there is more financial visibility available.

Where trustees do agree to change the funding arrangements , the trustees will still need to comply with their legal obligations in terms of completing and submitting to the Pensions Regulator new actuarial valuations, schedules of contributions and amended recovery plans.

Abbiss Cadres can support sponsoring employers/trustees of defined benefit schemes in negotiating and agreeing funding plans with the Pensions Regulator, whether they relate to deficit repair contributions or future service payments. We can also advise on pensions law in relation to refinancing and restructurings. To find out more about how we can help please get in touch.

Disclaimer

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The author

Gary Cullen
Partner
Pensions Law
D: +44 (0) 207 036 8398
T: +44 (0) 203 051 5711
F: +44 (0) 203 051 5712

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